The Market Ticker
Commentary on The Capital Markets- Category [Federal Reserve]

Here's the problem: The durables number recently published, the fact that employment growth is not strong (as I pointed out in my interview on Stocks-n-Jocks) and now the collapse in energy that has roundly distorted the CPI, which the Fed claims they must follow (in terms of expectations) means that The Fed will both be behind and unable to respond when, not if, the trend shown in the durables report rears it's ugly head.

The equity market is on the wrong side of this folks.  The bond market, on the other hand, is not.

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It's amusing to watch a man argue for his own incarceration.......without realizing it.

Widespread manipulation of key benchmark interest rates such as the London Interbank Offered Rate, or Libor, threatens public confidence in the financial system, and must be prevented through fines and criminal prosecution, Federal Reserve Gov. Jerome Powell said Tuesday.

How about Treasury rates?  Is manipulating them something that must be prevented through fines and criminal prosecution too?

Just curious, Mr. Powell...... and I'm sure you can figure out why.

Dealers at major Wall Street firms are alleged to have manipulated interest rates to benefit their trading positions, and banks were accused of reporting artificially low rates in the financial crisis to conceal their problems. Seven banks and brokerages have settled with regulators over alleged manipulation, and some of their employees have been criminally charged.

The Fed is a private bank; yes, they operate under a government charter but in fact so do all federally-linked banks -- which is basically all of them.

So if it's improper to manipulate various rates if you're JP Morgan, why isn't it equally improper to manipulate rates at the Federal Reserve through programs such as "QE"?

Heh Powell, did you grab one of these?

Suicide by genesis

and set yourself up for a pair of these with that speech?

Handcuffs by genesis

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smiley

Yeah, ok.  It is if you look at the various price changes standing alone.

But the internals tell a different story.  Up/Down volume are nearly flat on both the Nasdaq and NYSE.  TICK and TICK/Q have been trending down.  Only TRIN remains solidly under 1 and has since the open.

The big "spike" move overnight, and the "credit" for this move, appears to have come from Charlie Evans of the Chicago Fed who said that an interest rate increase would be a "disaster" in a speech.

Well, perhaps, and the reason is not hard to figure out: Anything that increases the carrying cost of all the debt that has been used to financially engineer outcomes over the last decade, including in governments, would be very, very negative.

The problem is that many believe The Fed will act only if inflation gets out of hand.  Wrong.  The Fed has other masters, specifically, the banks and fixed-income portfolio holders that are all big financial companies and governments.

The problem with extremely low rates is that they draw forward economic outcomes through financial engineering at the expense of those long-dated obligations.

Yet those obligations don't go away -- at least not without severe political and economic consequence.  Oh yes, not today, but tomorrow with certainty.

I have long argued that QE did not end due to "inflation expectations" but rather due to The Fed being forced to end it as a consequence of embedded damage in long-dated laddered bond portfolios -- including, most-importantly, Social Security and Medicare.

Those obligations cannot be met in the current low-rate environment and neither can insurance company obligations.  

It's mathematically impossible.

So here's the conundrum -- rates must rise and, if they do, durations can be shortened in those portfolios (provided rates rise enough!) to dig out of that hole or at least decrease the size of the blast if it cannot be avoided.  But, should rates rise then those financially engineered corporations and other segments of the economy, which by the way reach all the way into municipal government bond issues, go "boom."

Damned if you do and damned if you don't The Fed be -- in other words, they're just plain damned.

And, because we the people sat for this and even cheered it on, so are we.

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